It was the height of tax season six years ago, when stressed-out financial planner Janet Freedman rushed outside her Toronto home, arms full of bags and tax returns, on her way to a 10 a.m. meeting. Suddenly, one misplaced footstep sent her tumbling down her front stairs. Freedman landed headfirst, breaking her neck and partially severing her spinal cord. Paralyzed from the neck down, Freedman was placed on a ventilator, leaving her unable to communicate with family and friends.
With months of gruelling recovery and rehab ahead of her, she could not work for almost a year. So, in addition to her personal devastation, her Toronto-based business, Finance Matters Ltd., suffered a dramatic blow. Freedman lost a year of revenue. She was forced to lay off her sole employee and couldn’t repay an outstanding $35,000 business debt. Though Freedman can now walk and work again, she had to move her business from its new office back into her home. Plus, fatigue has forced her to reduce her workload-and earning potential-by two-thirds. Yet, it could have been even worse: without an adequate financial plan, Freedman would have faced total business and personal financial ruin.
No one wants to think about the possibility of a serious accident or illness, but statistics indicate that one in three Canadians will be disabled for 90 days or longer at least once before age 65. For business owners, the effects of a severe injury or critical illness can be crippling. Yet too many entrepreneurs consider themselves “unsinkable” and fail to create a financial contingency plan in the event they must stop working unexpectedly, says Christopher Kruczynski, principle of The Marchand-Kruczynski Group at ScotiaMcLeod, a financial planning agency in St. Catharines, Ont. “By not planning,” says Kruczynski, “you’re imposing more risk on yourself and your family than your business itself does.”
Your contingency plan should start with adequate insurance. “Fifty years ago, the mantra was: ‘You need life insurance, or what will happen to your family if you die?'” says Freedman. “But it’s more important now to ask, ‘What’s going to happen to my family if I live?'”
“Living benefits” insurance policies offer financial security if you survive but lose your ability to generate income. Among them are disability, critical illness and business overhead insurance.
Disability insurance should be top of mind, says financial advisor Diane Dupuis, president of Richmond, B.C.-based Dupuis Langen Financial Management (1985) Ltd. It provides monthly payments to replace lost income if you’re unable to work due to illness or injury. Freedman, who wrote about her experience in Hit By An Iceberg: Coping with Disability in Mid-Career, agrees: “I would have gone bankrupt without it. It’s keeping me at a very similar take-home pay to what I had before.”
Policies vary widely, so look for contracts with lengthy payout periods (to age 65 or beyond) and an “own occupation” or “regular occupation” definition of disability, which entitles you to benefits if you can’t perform your exact job. (Otherwise, benefits might be paid only if you’re unable to work at any job.) You may also find policies that provide income top-ups if you decide to go back to work at reduced hours, and a provision for the return of your premiums if you don’t make any claims.
Critical illness insurance provides a one-time, lump-sum cash payment if you’re diagnosed with an illness specified by your policy, such as heart attack, stroke or cancer, regardless of your ability to work. Competing providers boast individual perks, such as access to world-class doctors or coverage for specific treatments, but the underlying principles are the same among major companies, says Dupuis. Business overhead insurance typically covers fixed costs, such as rent and staff salaries, though it cannot be used to pay for someone to replace you. It’s best suited to small firms or professional practices, says Dupuis, for which revenue is heavily dependent on the presence of the lead entrepreneur.
To determine how much insurance you need, run a “crash test” on your income and liabilities, says Dupuis. If your financial resources won’t last a year, look to insurance to make up the deficit. Be sure to factor in costs such as medications, home modifications and income for homecare or family members who might have to take time off work.
Still, insurance isn’t the whole story. A solid plan also includes drafting powers of attorney-one that assigns an individual of your choice the right to make health-care decisions and another for financial/property/legal decisions on your behalf if you become incapacitated.
If you have partners, you’ll also need an up-to-date shareholders’ agreement to help clarify ownership issues if you sell your stake of the business. As part of a buy/sell agreement, says Dupuis, consider a clause that allows your partner(s) to fund the purchase of your shares using the proceeds from insurance held at the corporate level.
Build a solid management team that can run the firm in your absence. “Make sure you’ve got a second-in-command in place, a good management team and people to bring up through the ranks,” says Kruczynski. To help groom successors, suggests Dupuis, introduce them to the clients that you handle.
Finally, don’t overlook a will and a succession plan that gives your final instructions and settles your estate.
Once you’ve laid this groundwork, don’t hide it. Keep copies of key documents, including banking information, insurance contracts, shareholders’ agreement and powers of attorney-together with contact numbers for each-in an accessible place. After Freedman’s accident, her daughter was able to find the power of attorney, but had trouble finding the supporting documentation.
With a solid plan, “not only are you taking care of yourself and your family, you’re also doing good things for the business,” says Kruczynski. “The No. 1 bomb out there is thinking that you don’t need to do this. Everyone needs to.”